Federal Carbon Taxation as a Sustainability Instrument: Macroeconomic Impacts, Circular Economy Transition, and Sustainable Development Implications for the United States

Achieving sustainable development requires decoupling economic growth from fossil fuel dependence—a challenge that places carbon pricing at the intersection of environmental policy, economic efficiency, and social equity. Carbon taxation is widely regarded among economists as the most cost-effective instrument for reducing greenhouse gas emissions, yet the United States has not adopted a federal carbon price. This study examines the macroeconomic and sectoral consequences of a hypothetical federal carbon tax using the Standard GTAPv7 computable general equilibrium model calibrated to GTAP Database version 12 (2023). A tax rate of 27.7% is derived from the Regional Greenhouse Gas Initiative (RGGI) average auction price of USD 12.81/t CO2 for 2023—the lowest among active U.S. state carbon programs—and applied as a production tax shock to the fossil fuel sector. Simulations at the California (USD 32.93/t CO2) and Washington state (USD 53.10/t CO2) prices provide sensitivity bounds. Under the baseline scenario, U.S. real GDP falls by 0.09%, unskilled employment declines by 0.17%, and fossil fuel production and exports contract sharply. Outside the fossil fuel complex, most sectors record output and export gains, and total U.S. net exports improve by 0.33 percentage points. Bilateral GDP spillovers across eighteen trading partners range from −0.17% (South Korea) to −0.01% (Australia), principally through fossil fuel trade exposure. The results demonstrate that a federal carbon tax at the RGGI price can achieve meaningful emissions reduction at a contained macroeconomic cost, supporting the environmental pillar of sustainability. The concentration of adjustment burdens on unskilled workers highlights the social sustainability challenge of ensuring a just transition. The production reallocation from fossil-intensive to non-fossil sectors is consistent with the circular economy framework and contributes to long-run economic sustainability by reducing dependence on finite, non-renewable resources. Revenue recycling, just-transition provisions, and carbon border adjustment are identified as complementary policy instruments essential for aligning carbon taxation with the integrated environmental, economic, and social dimensions of sustainable development.